We are entering a New Age of World Austerity

As the world economy emerges from recession it is clear that the recovery is going to be weak. All governments also face a huge debt overhang, which means that whoever is in power will have to carry out stringent economic measures and it is the working class who will be made to pay. This opens up the prospect of huge class contradictions opening up in the coming period.

The world economy is gradually emerging from the biggest economic crisis since the 1930s. In Britain last year we saw the biggest fall in economic output in any single year since 1921. Now there are signs of a slow painful recovery. However, there will be no return to “normality”. The crisis marks the end of an epoch economically and politically. We are now entering the age of austerity.

The economic crisis has plunged bourgeois economists into complete disarray. These apologists of capitalism have not the slightest understanding of the laws that govern their system. In the inaugural conference of the Institute for New Economic Thinking, sponsored by George Soros, and including five Nobel prize-winners, the participants “could neither agree on the cause of the crisis nor the necessary remedies.” (Financial Times, 10/4/10)

The crisis was however a complete confirmation of the correctness of Marxism which understood and predicted such a development. Inherent within the capitalist system is crisis, which arises from the anarchy of capitalist production. The system itself erects barriers to its own development that periodically end in slump. This was no ordinary crisis, after which everything will simply return to normal. Capitalism has entered a blind alley, where the existence of private ownership and the nation state now act as a colossal brake on the development of the productive forces. The decade between 2000 and 2009 saw average growth rates fall to 1.7% per year, the worst decade since the Second World War. It is a symptom of the complete impasse of capitalism.

In the past, the system was able to at least partially overcome these fundamental contractions by the expansion of world trade. Globalisation, the intensification of the world market, provided a certain breathing space. But this no longer works. We are entering a new period of prolonged crisis and austerity, inter-spaced with periods of partial and weak recovery.

There was a universal sigh of relief from the capitalists that they had managed to avoid a complete collapse of the productive forces and the development of a new Depression. The system seemed to have suffered a heart attack but managed to survive. However, the serious strategists of capital look to the future with dread and foreboding. They have an inkling that there is something fundamentally wrong.

“The near-panic of the last year seems likely to be displaced by a deeper unease”, explained the special Financial Times report ‘The World 2010’ entitled “Unease overshadows a sense of relief” (27/1/10). It gives a number of reasons for this anxiety.

“First, there is the fear that economic disaster may only have been pushed further into the future rather than avoided altogether. The massive fiscal stimuli unleashed in the US, China and the European Union will have to be reined in at some point. But this is a risky business. There is a fear that if spending is cut too soon, economies could fall back into recession. But if loose money policies are continued for too long, they could simply stoke new speculative bubbles of the sort that popped so disastrously in 2008. Meanwhile, there is a background concern that unemployment will stay stubbornly high for an alarmingly long period. In the US, the broad measure of unemployment stands at more than 17%. Those who are still preoccupied by parallels with the 1930s recall that it was not until three years after the Wall Street crash of 1929 that it became clear a financial panic had turned into a full-scale depression.

“The second reason for disquiet is a lingering sense that it will be impossible to return to the comforting economic and political certainties of the pre-crash world.”

No return to normality

There will be no return to “normality” or the “certainties” of the past. The system only managed to avoid an outright depression by the unprecedented bail-out, estimated to be in the region of $14 trillion. According to the Bank of England, the total support offered in Britain and the United States amounted to 74% and 73% of their Gross Domestic Product respectively. Staggering sums were poured in to rescue the capitalist system in its hour of need. Unprecedented measures were needed in unprecedented times. The finances of the state were put at the disposal of the bosses' system. This comes with enormous cost and consequences for the future. That is why there are heated debates over how fast they can implement an exit-strategy from the bail-out policies. However, there is a further dilemma.

“We have been able to survive this major economic shock by throwing money at it”, explained John Hawksworth, PwC’s head of macroeconomics. “But who is to say in ten years it won’t happen again? So we should be planning to get back into surplus so that we have some money to throw at it [next time].” The problem is that a new crisis could develop in the next four or five years when governments are still struggling with debts from the previous crisis.

The scale of this current rescue package has never been equalled. This reflected the depth of the crisis, which, given its scope and breadth, was even more serious than the crash of 1929-31. The intervention by the state is not new. The revolutionary crisis following the First World War pushed the capitalist governments to intervene.

As Trotsky explained,

“...the ruling bourgeois cliques corrected themselves in time and carried through a large-scale financial and government policy designed to mitigate the crisis of demobilisation. The state budget continued to retain the monstrous proportions of the war epoch; many enterprises were artificially kept in operation; many contracts were prolonged to avert unemployment; apartments were rented at prices prohibiting the repair of buildings; the government subsidised out of its budget the import of bread and meat. In other words, the national debt piled up, the currency was debased, the foundations of economy were undermined – all for the political purpose of prolonging the fictitious commercial-industrial prosperity of the war years.”

However, despite the efforts of the capitalists, as Trotsky goes on to explain, this solved nothing.

“But this fictitious boom very quickly ran up against universal impoverishment. The consumer goods industry was the first to come to a standstill because of the extremely reduced capacity of the market, and it threw up the first barriers of over-production which later obstructed the expansion of heavy industry. The crisis assumed unprecedented proportions and unparalleled forms.” (Leon Trotsky, Flood Tide, December 25, 1921, published in First Five Years of the Communist International, vol.2, p.75)

“Austerity! Austerity! Austerity!”

At the present time, all the politicians and representatives of capital are banging the same drum, “Austerity! Austerity! Austerity!” From Greece, Spain, Ireland and Iceland to Eastern Europe and beyond, the message is the same. In Britain, the Tory leader Cameron states “We are entering a new age of austerity”. Gordon Brown talks about “an era of hard choices”, while Nick Clegg calls for “savage cuts”. This is the language of the 1930s and the years of the Depression. It is a dire warning of what is to come in Britain – as elsewhere.

The unprecedented bail-out, the fiscal stimulus and collapsing tax revenues have sent government debt spiralling. Government debt burdens are racing to thresholds of around 90% of Gross Domestic Product (GDP). A number are much higher. The UK’s public sector net debt has doubled over the past five years to £857bn, a similar percentage to that of Greece. The British government plans to borrow more in four years from 2008-09 than in the whole history of British governments since William the Conqueror. The programme ahead is to slash public spending and put up taxes on a scale not seen in generations. The danger is that this can produce a prolonged period of economic crisis, from which they cannot escape.

“An attempt to cut a fiscal deficit by 10% of GDP, via cuts in spending, would require an actual reduction of 15% of GDP, once one allows for falling fiscal revenue. The GDP would also shrink by 15%”, explains Martin Wolf in the Financial Times. “As Desmond Lachman of the American Enterprise Institute pointed out, the decline could be even larger. This looks dire – and it is.” (FT, 10/2/10) If this, however, is not tackled, he warns, “countries could suffer decades of slump”. According to Stephen Roach, the chairman of Morgan Stanley Asia, “it is conceivable that we could face another destabilising crisis.” As we can see, the capitalists are caught between the devil and the deep blue sea.

Yesterday’s financial crisis is turning into today’s government debt crisis. Banking defaults are threatening to push countries into defaulting, beginning with the weaker countries of the European Union. They are desperate to avoid this scenario. The IMF has been strengthened with more resources, but any such assistance comes with a large dose of bitter medicine.

Only a robust recovery could alleviate this problem, however that is ruled out. At best, the recovery will be weak and anaemic, given the enormous amounts of excess capacity and lack of investment. Personal debt as well as the threat of unemployment also bears down on the recovery. In 2008, UK household debt was equal to 181% of disposable income. In the USA it was 132%. “It is a recovery that feels like a recession”, as one commentator explained. Projected growth rates in 2010 vary from 0.9% for Italy, 1.4% in Britain, 1.5% in France, 1.7% in Germany, while Japan’s forecast is 1.5%. Out of the G7 only the USA and Canada are projected to get more than 2%. This is nothing more than a snail’s pace recovery. More importantly, it will also be a recovery at the expense of the working class.

Eurozone in a vice

Drawing by Latuff.Drawing by Latuff. The eurozone countries in particular are caught in a vice. After the binge comes the hang-over. The Common Market was set up to develop a European-wide market as a means of overcoming the narrow constraints of the nation state. It was an indication that the productive forces have completely outgrown these national barriers. In the boom years, such European integration was possible, even going so far as to establish a common currency. This, because of the prolongation of the boom, went much further than we had expected. However, this imposes enormous constraints on national economies which come under pressure in periods of economic crisis, in much the same way as the countries adhering to the Gold Standard in the 1930s. In the past, weak countries could attempt to escape from their problems by devaluation of their currency and becoming more competitive, which the British capitalists are attempting to do. This is now ruled out for the eurozone. The European Treaty and the European Central Bank will not permit such recklessness. The national interests of each capitalist class come into conflict with the interests of the EU as a whole. Their problems, especially a fiscal deficit, must now be resolved internally through savage cuts and tax rises.

Each country is at the mercy of the international debt markets and the speculators. The weakest are the most vulnerable. Greece, Spain, Portugal and Ireland are especially targeted given their colossal fiscal deficits. This has led to a crisis of the eurozone with the weaker members threatening to undermine the whole union. The fear of contagion is widespread.

“There appears to be an accelerated and impending sense of doom about the status of the euro”, stated Andrew Wilkinson, senior analyst at Interactive Brokers. “The single currency is sitting on the edge of a precipice.”

Of course, the European capitalists will do all in their power to prevent such a catastrophe, despite the extra burden this imposes on them. This has opened up a clash between the separate states, which fear for their national interests. The Germans are the least cooperative, but were under pressure from the French and Italians bourgeoisie. After months of squabbling, they have managed to come to a paper agreement to assist the Greek government get over their immediate fiscal crisis.

Greek crisis

The Greek crisis was spiralling out of control following a downgrade of the country's credit rating that pushed government borrowing costs to a 10-year high. The EU was forced to intervene with a deal to provide loans of £26.5bn below market rates. The German Chancellor Merkel was a very reluctant partner. First of all there could be no “bail-out”, then the IMF needed to be kept at arm’s length, then the Greeks needed to pay higher interest rates. The Germans finally agreed to the package, with the unprecedented involvement of the IMF. They still need to get parliamentary approval before the deal could be implemented. But this will be a formality as a default in Greece would wreck the eurozone, precipitating crises in Portugal, Spain, Ireland and others. They would either have to hang separately or hang together. The markets must be appeased at all costs. However, German elections in May threaten to undermine Merkel’s majority in the Bundesrat, the upper house, as many Germans are opposed to any such bail-out.

In an attempt to calm nerves and paper over the divisions, Jean-Claude Trichet, president of the European Central Bank, made it clear that bail-outs were not universal. “There is a high stakes poker game going on and Mr Trichet played his hand the best he could,” said Julian Callow, European economist at Barclays Capital.

Despite the deal, the Greek economy continues to spiral down. The continuing crisis saw output fall by 2.9% in January and more than 10% compared to a year ago. The economy will be further squeezed with the high costs of servicing debt and the cuts that are planned. The other European economies still remain in the doldrums. The biggest economies, including Germany, France, Italy and Spain were either flat or suffered modest falls in output. Although industrial production has risen, it still remains about 15% below pre-crisis levels. However, in the coming months the picture looks uncertain with stimulus measures, such as car scrappage schemes, being withdrawn.

The Financial Times recently asked some uncomfortable questions. “Is the Greek austerity plan realistic? Will Greece be able to pull through? What happens if Portugal gets into difficulty? What about Spain? What about Italy?” These are unanswered questions, but the implication is clear. The Greek crisis is not an isolated case; it is part of a wider European crisis that is far from resolved.

Attacks on living standards have already begun. In March, the Greek government had increased VAT and indirect taxes on fuel and tobacco. Public sector workers have faced the brunt of these cuts. A seven percent cut in wages and a 10% cut in allowances imposed by the PASOK government will mean real hardship, and this is only the beginning. The EU leaders, including the IMF, are demanding that the Greek government take further austerity measures to tackle the budget deficit. The country will need to pay back some 22bn euros by the end of May, forcing it to raise further borrowing at high interest rates. “We will not let the country sink”, stated George Papandreou, the prime minister. “Yes, we have to take more measures.”

This declaration of war against the workers of Greece and Europe generally has not gone unchallenged. Such austerity plans have provoked protests across the eurozone, not least in Greece, which has seen a series of general strikes embracing private and public sector unions. “We demand from the government and Brussels that people and their needs are put above markets and profits,” said Stathis Anestis, a member of the executive committee of GSEE, the umbrella union of private sector workers.

Provoking a backlash in Greece…

As the Greek economy continues to spiral downwards, yesterday yields on government debt soared to a euro-era record, indicating market fears that Athens would in fact not be able to finance its debts. The IMF is to spend 10 days in Athens working out the terms of a Greek bail-out. This will inevitably entail further harsh austerity measures, on top of the two rounds of public sector wage cuts and increases in indirect taxes.

Public transport, state-controlled banks and government offices are set to close tomorrow, with several hundred thousand workers expected to take part in a 24-hour strike called by ADEDY, the public sector trade union.

Now the financial markets have recognised that bailout or no bailout, Greece is heading for a default, sooner or later. A bailout could put off a default for a period, but the crisis of Greek capitalism is deepening. Greece has a debt to GDP ratio of 125%. It will need to raise around £44bn in finance for each of the next five years to roll over existing debt and pay interest. That adds up to about 250bn euros, or about 100% of Greek annual GDP.

The latest figures show that this year, the economy will shrink by between 3% and 5%. Nominal GDP will probably contract more sharply in 2011, and possibly into 2012 and the succeeding years. The massive cuts that are looming in public spending and wages are likely to push the economy into a deflationary spiral.

This means a savage attack on the living standards of the Greek working class. Huge class battles are on the order of the day in Greece as elsewhere.

... and Spain, Portugal, Ireland

In Spain, workers have protested against the government’s proposal to increase the retirement age to 67 from 65, raising VAT and imposing other cuts. As in Greece, the government is looking to reduce its massive budget deficit of 11.2% of GDP at the expense of the working class. “Reform” of the labour market is also being proposed to bring about greater flexibility of labour and allowing employers to sack workers more easily. This at a time when unemployment stands officially at nearly 20%, double the average rate of the eurozone. Rodriguez Zapatero, the Socialist prime minister, stated bluntly that Spain will introduce its economic austerity plan to cut its budget deficit “whatever the cost”, and “if we have to make more cuts or demand more austerity, then we will do so.”

In neighbouring Portugal, public sector workers staged a one-day general strike in March in protest at the wage freeze being imposed by the Socialist government, again an attempt to cut its budget deficit. Jose Socrates, the prime minister, said the austerity plan proposed would be “bold and decisive”.

“Similar conflicts pitching the requirements of international creditors against the demands of workers’ representatives are breaking out elsewhere in the eurozone”, commented the Financial Times.

In Ireland, workers have also taken to the streets in protest at cuts in public sector pay. The government has slashed public spending through wage cuts and welfare payments, and is looking for a further 3bn euro cut in next year’s budget. The plan, agreed with the European Commission, is to return the deficit to below the 3% limit set for members of the eurozone by 2014. Despite this, the budget deficit is expected to rise from 11.3% of the GDP to 12%, as growth rates remain low.

Public sector unions are threatening to step up their industrial action and have rejected the terms of a deal where the government in the Irish Republic ruled out further pay cuts and compulsory redundancies, on the basis of savings from public services.

Other countries will not be far behind, including Britain. Whoever wins the general election, the question will be posed sharply of reducing the historically high budget deficit. As in the rest of Europe, workers in Britain will be forced to struggle against the coming austerity measures. Already, George Osborne, the shadow Chancellor, has made it clear that if the Tories win, “Within months we will be the most unpopular government since the war”.

An entirely new period

The epoch of austerity facing the working class, the likes of which we have not seen since the inter-war period, marks the beginning of an entirely new period. The period of reforms, which largely characterised the previous 60 years, is now at an end. We are now in a period of counter-reforms and brutal attacks, which could possibly last for decades if the working class do not take power into their hands. The ruling class will always find a way out of even the deepest crisis but it will be at the expense of the working class. This will sharpen the class struggle and serve to harden the working class, especially the youth. Millions who have never before been involved in struggle will be forced to defend themselves. They will learn from this bitter experience that their problems can never be solved under capitalism. They will begin to draw political and even revolutionary conclusions.

“Such shake-ups are of very great revolutionary importance”, explained Trotsky. “They shake off their conservativeness. They force them to seek an account of what is happening, what is the perspective. And every such shake-up pushes some stratum of the workers onto the revolutionary road.”

On the basis of capitalism lies a nightmare for working people. Conditions determine consciousness, as Marx explained. On the basis of events, consciousness will be brought into line with the objective situation in an explosive fashion. The titanic events that lie ahead will propel the working class in the direction of changing society. On this basis, a mass left wing will develop within the mass organisations of the working class. In order to prevent the set-backs of the past, it is vital that we build the forces of Marxism and connect them with these left currents. With a correct programme and leadership, the rotten capitalist system can be swept way and the basis laid for the socialist transformation of society in Britain and internationally.